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European Commission


Brussels, 11 December 2013

Commission staff conclude fourth Post-Programme Surveillance mission to Hungary

European Commission officials conducted a mission to Hungary from 4 to 10 December 2013 to review recent developments and policy initiatives in the context of post-programme surveillance linked to EU balance of payments assistance between 2008 and 2010. This has been the fourth such surveillance visit since the expiry of the financial assistance programme in November 2010.

The mission welcomed the recent improvements in the macroeconomic situation. In addition to net exports, domestic demand has also started to contribute to the recovery, albeit partly on account of indirect fiscal stimulus measures. Looking ahead, economic growth is expected to pick up gradually, supported, by stepped-up absorption of EU funds. The continued current and capital account surpluses decreased external debt and the market-based financing of the public debt was smoothly ensured. At the same time, important vulnerabilities remain, characterised notably by still high private and public debt levels, high financing costs, and a low growth potential, linked also to persistently weak lending and a series of non-market friendly policy measures.

Following the abrogation of the excessive deficit procedure in June 2013, the government’s commitment to fiscal discipline appears to be broadly maintained. However, there is no margin for possible slippages in the 2014 budget; any further deficit-increasing measures or negative developments, unless they are fully offset by compensatory measures, would increase the deficit above the 3% of GDP threshold. Furthermore, the mission stressed the need to pursue growth-friendly fiscal consolidation, focusing on expenditure savings, and to preserve a sound fiscal position in compliance with Hungary's medium-term objective. Also, the sustainability of the fiscal correction would be enhanced by improving the transparency and the predictability of the budgetary planning. The mission took note of the recent amendments introduced to improve the fiscal framework in the context of transposing Council Directive 2011/85/EU on minimum requirements for national budgetary frameworks.

The mission expressed concern about continued obstacles to the banking sector to contribute to economic growth. Bank lending continues to be hindered by excessive and further increasing burdens on banks and a high share of non-performing and restructured loans. The mission welcomed the central bank's intention to ease financing conditions for small and medium-sized enterprises. In this regard the Funding for Growth Scheme can provide a temporary improvement in access to credit, but raises concerns about potential fiscal costs and the risk of unsustainable price competition. Restoring normal lending to the economy in a sustainable manner would require an improved and predictable operational environment for the financial sector, conducive to enhanced portfolio cleaning as well as capital accumulation.

The mission highlighted that reinforcing the medium-term growth prospects, also with a view to putting the public debt-to-GDP ratio on a firm downward path, would necessitate significant improvements in the business environment. Barriers to entry and limited competition in several segments of the service sector put a drag on productivity and foreign direct investment. The mission discussed with the Hungarian authorities possible structural reform steps to stimulate growth, notably in the financial sector, labour and product markets, in line with the Council’s Recommendation of 9 July 2013 addressed to Hungary in the context of the European Semester.

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